Recent Amendments to the Income Tax Act that Impact Lawyers

September 7, 2023

The Law Society would like to bring to lawyers’ attention amendments made to the Income Tax Act (ITA) that impact both trust accounts and reporting obligations in relation to client transactions.

These changes may require you to report on any separate trust accounts you have for particular clients, as well as report on any “reportable transactions” and “notifiable transactions” of your clients. Reportable transactions arise in the context of transactions that are “avoidance transactions” resulting in certain tax benefits, and notifiable transactions are transactions designated by the Minister of National Revenue as notifiable.

The amendments are now in force.

While disclosure of information under these various provisions is not required if it is subject to solicitor-client privilege, the application of this protection in particular cases may be unclear.  There is currently a lack of guidance as to how these new provisions will be interpreted and how they will impact lawyers.

It is hoped that guidance will be coming soon. In the meantime, it is important to understand what the amendments say and to consider how they may impact your practice and tax reporting obligations.

The following provides more information on the amendments to the ITA.

Trust Accounts

The Fall Economic Statement Implementation Act, 2022, assented to on December 15, 2022, made changes expanding the scope of the statutory obligation to file annual tax returns in the context of trusts.  To provide context, the ITA has never recognized so-called “bare trusts” as trusts for the purposes of the ITA, and as a result the trustees of bare trusts have not been subject to the tax return filing obligations that have always applied to other trusts.  Lawyer trust accounts are an example (along with many common nominee arrangements) that have been disregarded for tax purposes. This has now changed.

Lawyer trust accounts and other bare trusts have been brought within the scope of the obligation to file annual trust tax returns, subject to some important exceptions described below.  This obligation to file falls specifically on the lawyer or law firm that holds the client funds in trust.  This obligation applies to trusts that are in existence during 2023 and beyond, again, subject to some exceptions.  Section 150 sets out filing requirements and requires filings for trusts to occur within 90 days from the end of the year.

While trusts that are required under the relevant rules of professional conduct or the laws of Canada or a province to hold funds for the purposes of the activity that is regulated under those rules or laws (ITA 150(1.1)(c) as amended) are generally exempted, the exemption only applies to trusts that are not maintained as a separate trust for a particular client or clients (ITA 150(1.1)(c) as amended).

As a result, all general / pooled trust accounts are exempted from the new filing obligation.

If you maintain separate trust accounts for particular clients, note that there are additional exemptions for short term trusts and low value trusts in paragraphs 150(1.1)(a) and (b), as amended, that may apply to separate trusts for particular clients:

  • paragraph 150(1.1)(a) exempts trusts that “had been in existence for less than three months at the end of the year”, and
  • paragraph 150(1.1)(b) exempts a trust that “holds assets with a total fair market value that does not exceed $50,000 throughout the year” if composed only of listed assets, including money.

The amendments to the ITA in section 150 also specify that no disclosure is required of privileged information, with a new subsection (1.4) stating “For greater certainty, subsections (1.‍1) to (1.‍3) do not require the disclosure of information that is subject to solicitor-client privilege.”

The package of amendments to the trust reporting provisions also included a new regulation requiring trusts to include, in their tax returns, additional information concerning settlors (as defined in ITA subsection 17(15)), the trustee, all beneficiaries and “each person who, in the year, has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust” (Income Tax Regulation 204.2(1)).

There are penalties for non-compliance and late filing.

Reporting Obligations

The recently adopted Budget Implementation Act, 2023, assented to on June 22, 2023, increases reporting obligations through the creation of a number of new sections and amendments to a number of subsections in Part XV of the ITA, Administration and Enforcement.

Lawyers should pay particular attention to the changes in definitions and penalties for reportable transactions, the new provisions for notifiable transactions, and the statement on solicitor-client privilege. Potential reportable and notifiable transactions should be reviewed to assess their reportability and how solicitor-client privilege may apply.

Many changes are seen to section 237.3, focusing on reportable transactions:

  • the definitions in subsection 237.3(1) have been amended to change the definitions of “avoidance transaction”, “contractual protection”, and “reportable transaction”,
  • the amendments add a definition for “tax treatment” and strike the definition of “solicitor-client privilege”,
  • the application of the reportable transaction provisions have been amended in subsection 237.3(2),
  • filing timelines have changed in subsection 237.3(5) with a 90-day reporting requirement,
  • reporting by one party is no longer reporting by all, as this provision was struck along with the joint and several liability sections,
  • the penalties in subsection 237.3(8) have expanded to result in significant penalties for those who fail to file an information return, which can include the fees charged, $10,000 and penalties for delayed reporting up to $100,000, and
  • the statement regarding solicitor-client privilege in subsection 237.3(17) has been amended to read “For greater certainty, this section does not require the disclosure of information if it is reasonable to believe that the information is subject to solicitor-client privilege.”

The key amendments are to the definitions of “avoidance transaction” and “reportable transaction”, which significantly expands the potential scope of the reporting obligation.

New provisions have been enacted to require reporting of “notifiable transactions” in a new section 237.4. These are defined as:

notifiable transaction, at any time, means

(a)      a transaction that is the same as, or substantially similar to, a transaction that is designated at that time by the Minister under subsection (3); and

(b)      a transaction in a series of transactions that is the same as, or substantially similar to, a series of transactions that is designated at that time by the Minister under subsection (3).‍ (opération à signaler)

The new subsection 237.4(3) provides for the designation of notifiable transactions, stating “The Minister [of National Revenue] may designate for the purposes of this section, with the concurrence of the Minister of Finance, in such manner as the Minister considers appropriate, transactions or series of transactions.”

The overall provisions are similar to those for reportable transactions, with filing requirements, timelines, and penalty provisions. Subsection 237.4(18) applies the same statement regarding solicitor-client privileged as noted above for reportable transactions.

The amendments for reportable and notifiable transactions came into force upon royal assent on June 22, 2023. They are, therefore, now in effect.

There are also similar new provisions for “reportable uncertain tax treatment” as reflected in relevant, audited financial statements, contained in the new section 237.5. While not directly applicable to lawyers, a lawyer may come across such items when reviewing documents of or for a client and may want to advise the client of the new provisions.

Advocacy Efforts

These amendments have raised concerns in the legal community across the country due to the threats to client confidentiality, the placement of lawyers in positions of conflicts of interest and the erosion of solicitor-client privilege that these amendments potentially create.

The Canadian Bar Association actively advocated against many changes that were proposed and continues to engage with the Federal Government on their concerns regarding those amendments that were adopted and how they will be applied.

The Federation of Law Societies of Canada is also reviewing these amendments and determining their advocacy position.

Further Information

For further information on these changes and their impact on your practice, please consult a tax specialist or speak with a practice advisor.